The government is yet to announce the successor of Om Prakash Bhatt, chairman of the State Bank of India (SBI), the nation’s largest lender, who retired last week. Bhatt had close to a five-year stint. Since 1955, when the then Imperial Bank became SBI through an Act, only two other bank chairmen had longer stints—R.K.Talwar and P.C.D. Nambiar.
Also Read | Tamal Bandyopadhyay’s earlier columns
How has been Bhatt’s tenure and what is his legacy?
He was always eager to demonstrate SBI’s leadership in the industry. This was done by arresting the steady decline in market share and even gaining it and courting controversies by taking on the regulator.
Bhatt played the market share game by continuously adding to the bank’s branch network and automated teller machines (ATMs). Even on his last day, he launched the group’s 25,000th ATM and 9,000th rural branch. The ATM is located in a Mumbai suburb and the branch in Orissa.
While more branches helped the bank garner more deposits and ATMs ensured customer convenience for transactions, his game plan did not always succeed. For instance, his aggressive deposit raising programme in the wake of the collapse of Wall Street investment bank Lehman Brothers Holdings Inc. in 2008 saddled the bank with high-cost money which it could not deploy. Being a state-run bank, SBI could have mopped up huge money even in the normal course as private banks’ credibility was severely eroded in the global credit crisis and there was a flight to safety.
In banking, the market share game can be dangerous as cost of deposits can go up and quality of assets can go down if there is too much aggression to build a big loan book and mop up more and more deposits to support it. ICICI Bank Ltd, India’s largest private bank, tried to play this till it almost lost control and decided to consolidate. Bhatt picked ICICI Bank’s share, particularly in the mortgage market, by offering loans priced at special rates for the initial years. That was one of the many issues on which Bhatt had big fights with the banking regulator.
The Reserve Bank of India (RBI) will remember Bhatt for his defiance, something no Indian banker has done before. First, he offered guarantee to enable a Tata group firm to raise Rs 4,200 crore from the bond market, even though RBI norms do not allow banks such a facility. Before the controversy over this died down, Bhatt made news by refusing to make extra provisions that RBI wanted the bank to do on its special loans. RBI raised the provision for standard assets of such loans fivefold—from 0.4% to 2%.
The regulator prefers to describe such loan as teaser loans. Since they carry comparatively lower rates of interest in the first few years and the rates go up after this, such loans impact the quality of assets as chances of defaults by the borrowers are high, the regulator has said. Bhatt declined to make any provision, claiming the bank took into consideration a customer’s capacity to service the loan when the rates go up while giving such special loans. Since there is no risk of default, it doesn’t need to make extra provisioning.
Bhatt also had strong reservations about RBI’s norms on 70% provisions for bad loans. SBI has so far done close to 64% provisioning for its bad loans and sought time to raise it to 70%, while other banks have complied with the regulator’s directive. Higher provisions dent a bank’s net profit. Bhatt’s successor will have to set aside at least Rs 2,400 crore on account of provisions for special home loans and bad loans if he decides to abide by RBI rules, and to that extent, the bank’s profitability will be hit.
Let’s take a closer look at some of the financial parameters of SBI. Bhatt took over in July 2006. In four years, between fiscal 2007 and 2010 (we will get to know the 2011 numbers next month), the compounded annual growth rate (CAGR) of SBI’s net profit is 15.08%. Two other large public sector banks—Punjab National Bank (PNB) and Bank of Baroda (BoB)—have posted 20.45% and 24.40% CAGR, respectively, of net profits during this period. In the private sector, ICICI Bank’s comparative figure is a much lower 5.29%, but the second largest private bank HDFC Bank Ltd’s net profit grew at 20.9%.
SBI’s deposit base grew at 13.05% in these four years—higher than PNB’s 12.26%, but lower than that of BoB and HDFC Bank. ICICI Bank actually showed a decline in deposit growth. On loans, SBI’s growth has been lower than PNB, BoB and HDFC Bank. Here, too, ICICI Bank has posted negative growth.
To be fair, one must take into consideration the fact that SBI is much bigger than the others, and with a larger base, it’s not easy to match the growth of other banks. So, we should look at other financial indicators. On the share of low-cost current and savings account (Casa) of overall deposits, SBI (47%) was second after HDFC Bank (52%) in 2010. But when it comes to return on assets (RoA), SBI’s position was lower than at least eight banks, including PNB, BoB, HDFC, ICICI and Axis Bank Ltd. Its quality of assets, too, was worse than many of its peers, and while employee productivity is relatively low, staff cost is high. In fact, its cost-to-income ratio—the cost of overheads and employee salaries and wages, etc., in relation to overall income—was 51% in 2010, next to only Central Bank of India (52%).
Investors, however, shouldn’t complain as SBI shares during Bhatt’s tenure outperformed the benchmark Sensex index on the Bombay Stock Exchange as well as Bankex, the index for banking stocks.
Bhatt gave higher visibility to SBI through his aggression and marketing blitzkrieg; earned awe and respect of his peers, and annoyance of the regulator. His successor has a tough job in hand—improving its health and mending fences with RBI.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai.Please email your comments to email@example.com